Banking on Bad Credit:
New Research on the Subprime Home Mortgage Market
Patricia A. McCoy*
Since the early 1990s, the rapid growth of the subprime home mortgage market
has arguably been the most important development in alternative financial services and
undoubtedly the most controversial. Thus, it comes as no surprise that three of the papers
presented on the alternative financial services panel1 of Promises and Pitfalls report new
research on the subprime home loan market and related issues.
The subprime home loan market, designed for borrowers with weak credit,
continues to evolve at a breakneck pace. The past five years has witnessed the
institutionalization of subprime lending, with the locus of subprime loans shifting from
small, independent lenders to large mortgage subsidiaries of banks (particularly national
banks). Roughly two-thirds of subprime home loans are securitized on Wall Street, and
investment banks and their affiliates increasingly are not only underwriting subprime
securitizations but originating loans in subprime loan pools as well.
Another development, an unfortunate one, has been a sharp spike in home
foreclosures in many cities across the country, often driven by unaffordable subprime
*Professor of Law, University of Connecticut. My thanks to Kathleen Engel, Steve Ross, and Peter
Siegelman for their insights. All errors, however, are mine.
1 “Subprime Lending: Neighborhood Patterns Over Time,” Jonathan Hershaff, Susan Wachter, and Karl
Russo; “Mortgage Brokers and the Subprime Mortgage Market,” Amany El Anshasy, Gregory Elliehausen,
and Yoshiaki Shimazaki; and “Subprime Lending, Foreclosures, and Neighborhood Impacts,” Dan
Immergluck and Geoff Smith.
Final Version July 26, 2005
loans.2 As foreclosures have climbed, the subprime industry has attracted criticism from
consumers and the press for allegedly abusive lending practices and loan terms.
Because of such concerns, the legal landsca